The recent rate increases proposed by Citizens Property Insurance Corp. for optional sinkhole activity coverage, while eye-popping in a few regions, are not surprising to actuaries. We have observed the alarming trend in claims costs since the last big round of changes to Florida property insurance law — and observed the explosion of billboards and TV ads encouraging new claims. Legislation enacted this spring (Senate Bill 408) did not generate these claims, nor the need for the rate hike — it simply authorized Citizens to address the problem that is draining hundreds of millions of dollars annually from the coffers of the insurance safety net relied upon by millions of Floridians. By filing actuarially sound rates for this coverage, Citizens quantified the subsidy going to the abusive claimants pursuing large payouts for often minimal damage, often at the urging of public adjusters and plaintiff's attorneys. If the proposed Citizens sinkhole rate increase is not approved, then nearly all policyholders in Florida will face sharply higher assessments when Citizens runs deficits.
Regulators demanded detailed claims totals from all Florida insurers while studying this problem in late 2010. Citizens' response shows it incurred over 6,500 sinkhole activity claims and paid nearly $500 million in losses since 2006. Almost none of these claims were for "catastrophic ground cover collapse" — where a hole actually swallowed part of a dwelling. Citizens began separately charging for sinkhole activity coverage in 2007, and recently reported it incurred $245 million in sinkhole losses against just $32 million in sinkhole premium in 2010. Claim filings are nearly doubling annually, so trends indicate it can expect to incur thousands more claims in the coming year. Do the math, and you will see the need for a substantial sinkhole rate increase that is not the result of controversial modeling as with wind rates.
Some of the same legislators who vilify private insurers as unreliable and tout Citizens as the "people's insurance company" are now actively working to ensure it is starved of the premiums needed to support its promises to its policyholders. This is puzzling. A better use of that energy would be to attack the factors driving spiraling costs, such as claims settlement laws. Testimony highlighted abusive claimants who pocketed six-figure settlements with dubious evidence of loss and no responsibility to repair damage. But when Senate Bill 408 addressed the cost drivers behind the rate hikes, these legislators fought to kill rather than pass the reforms.
Critics say that private insurers may also ask for higher sinkhole activity rates mirroring Citizens' request. With the hard data coming to light, is it any wonder private insurers are wary of writing policies with sinkhole activity coverage at almost any price — no matter what else might be attractive about the risk? It's easy to forget, but prior to the sinkhole claims explosion, insurers competed aggressively for Tampa Bay area business. Regulatory data shows Citizens market share has rocketed in the region only in the past few years. And remember, all policies must ground cover collapse — there is no danger of being uninsured for a true sinkhole loss.
It's reasonable to ask whether the recent claims law reforms may stabilize or even reduce actuarially projected claims costs, and to consider some restraint in applying the full effect of rate increases immediately. But rates send a signal to consumers about the risk. A move to simply suppress yet another facet of Citizens' rates while enabling the "sinkhole lottery" to continue is bad for all Floridians, whether Citizens policyholders or those who are simply liable for Citizens' taxes when it cannot meet its obligations.
John W. Rollins is an independent consulting actuary focusing on Florida property insurance and based in the Gainesville area. His 21-year career has included serving as senior actuary at both Citizens and Florida Farm Bureau.